There has been much discussion lately on blogs, forums and even the AdSense Support Forum from publishers reporting that they've seen some pretty big drops in AdSense revenues.

By now, everyone should know about the global economic crisis and there's no denying that the US is in a recession. Advertising gets hit hard during a recession and many publishers are taking notice.

I decided to take a look at numbers Google files with the SEC related to its advertising and AdSense in particular to see what's going on. I've included some charts to help interpret the data. The last quarterly report filed was in September and the annual report hasn't been filed yet. I'll revisit this subject when it does.

From what I've seen, Google seems to be very fair to its publishers in some ways, maybe could improve in some other areas but most importantly, there might be cause for concern if you rely on your AdSense revenue in these tough times.

How much does Google keep from AdSense clicks?

This is likely different from publisher to publisher, especially when it comes to those that get invited to be premier publishers and can negotiate their own terms, but Google does list the revenue generated by AdSense and how much goes to the AdSense publishers in their SEC filings. The chart on the right shows the publishers share in red and Google's share in blue.

Over the past 4 years, Google has paid out an average of just over 80% to AdSense publishers. Before they were only giving publishers a little less than 80%. Considering the infrastructure and the quality of their targeting, that seems like a good deal. If you have a website with significant traffic that appeals to advertisers, you could do better with directly selling ads yourself, but even big publishers use AdSense because the small percentage they take is justified by the time saved. Big publishers likely have negotiated better terms and from reading the 10-Q statements, it seems that some publishers even have guaranteed payments defined in their contracts.

If you look close at the chart Google has been taking a smaller cut from AdSense in the past 4 quarters. 88% in the first two and 89% in the last two have gone to publishers. That may seem like good news at first read, but consider again that publishers have been seeing decreased revenue even with the increase in share. We also don't know how evenly that increase was distributed. It could have gone to all the premier publishers to meet contractual obligations or it could have gone to only regular publishers to help offset declining cost per click.

The good news is that Google seems to be willing to soften the blow to publishers a bit. Maybe they think this will only be temporary, until things calm down but many economists aren't expecting a quick economic recovery. Regardless, that's a nearly $120 million dollar hit they took to either keep publishers from bailing or to honor their contracts.

One of the things I've read in most of the quarterly reports is that advertising revenue is increasing due to increase clicks and not because of the increased price per click. If you want to keep your AdSense revenue up, you need to keep getting more traffic and more clicks.

Does Google keep the Good Advertisers to Themselves?

I've seen people ask this different places. This next chart shows what Google earns in advertising revenue from it's own sites in blue, the total revenue generated by Google Network web sites (AdSense publishers) in red, and the revenue share for publishers in yellow. Values are in thousands.

As you can see, ad revenue on Google's own sites has been climbing regularly while AdSense revenues haven't been growing as fast and have actually leveled off the last 2 quarters. In the first two quarters of 2004, AdSense publishers generated more revenue than Google did on their own sites. Now Google brings in twice as much revenue from their own sites.

Google doesn't reveal how many website publishers use AdSense, so there's no way of knowing what the traffic to those sites looks like over the same time period. Without this information, I can't make any conclusions but it is interesting that Smart Pricing began around the time when Google's websites started making more than AdSense publishers.

I understand the need for Smart Pricing. Not all web pages are created equal and they don't all convert in a consistent manner, so Google needs to look out for the advertiser. Reports I've seen also indicate that click-fraud is much more prevalent with AdSense than on Google's own sites. There were different reports but it was something like invalid clicks on search was around 15% and 25% on the content network.

There is not enough information to explain why Google's advertising is generating more revenue than AdSense publishers are, but it is clear that there's quite a big difference.

How much unpaid earnings is Google holding?

If you're familiar with AdSense you know that Google doesn't pay you until you reach $100 in your account. For some publishers, this can take a long time. Google reports this money on their SEC statements as "Accrued revenue share". All those AdSense accounts with less than $100 really add up. At the end of September, there was over $500,000,000. That's half a billion dollars that is likely earning interest for Google.

To be fair though, and I want to point this out because some bloggers missed this point, Google doesn't pay publishers as clicks are earned. You get paid a month later, even if you make more than $100 a month. So some of that accrued revenue share could only be 30 days away from reaching a publisher's pocket. But this Google Float, as some people call it, would bring in $15 million in interest each year, even in a simple 3% savings account. That may not seem like a lot, put when you consider Google makes billions a few cents at a time, that's pretty easy money.

So what's the bottom line

The economy sucks right now and there's not much that can be done about it. If advertisers are bringing in less revenue they'll have smaller advertising budgets. Google seems to be helping us out by (maybe?) giving us a larger share, but the revenue that goes to AdSense is half of the revenue generated on Google's sites.

Many people don't have the knowledge, connections or ability to generate the same revenue by handling the advertising themselves. I also find it hard to imagine that a company that would reduce its markup on clicks during these tough times would be shafting their publishers.

The good news, Internet advertising still hasn't reached its potential and there's room to grow. The bad news, with people facing financial difficulties, many are turning to the Internet and AdSense for some extra money. More publishers, more web pages, (more inventory) means more supply and less demand from advertisers means in the short term things are not likely to be as good as they used to be for many.

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